Last Friday, the SBA released its PPP Loan Forgiveness Application, which comprises 11 pages of forms, schedules, worksheets and instructions. The application can be found on the Treasury’s website here. It seems increasingly unlikely that a final ruling will ever be released; more likely we will have a series of interim final rules, FAQs, and the forgiveness application for guidance. Since the application was released in final form without review, don’t be surprised to see additional instructions or FAQs in the days ahead.

There are a few things to note regarding the application. Calculating forgiveness will rarely be straightforward, and borrowers may have fact patterns that are not addressed. The application does not address how the economic necessity for loans will be determined by the SBA. As a reminder, loans under $2 million were granted a safe harbor assumption of necessity; loans over $2 million will face scrutiny by the SBA. The application only addresses the mechanics of forgiveness, not the economic necessity. Finally, what we thought we knew about loan forgiveness has changed in important ways.

In this post, we’ll focus on the points that are new or have changed, not the entire calculation. Watch for additional information in the days ahead. Let’s dive in.

Forgiveness Basics:

• With the exception for alternative payroll period discussed below, the 8-week period for forgiveness begins with the disbursement of loan proceeds. Some borrowers had hoped for a delay in the 8-week period to better accommodate their situations. For example, a restaurant that is closed for most of its covered period may have difficulty in qualifying for forgiveness.
• Forgiveness appears to be limited to the principal, not accrued interest.
• We now have an answer to the question of what Congress meant by “costs incurred and payments made.” Generally speaking, it means costs incurred OR payments made. (We address the specifics below.) Therefore, covered rent, utilities, and interest incurred for a time before the 8 weeks that is paid for during the 8 weeks is allowable. Also allowable are covered non-payroll costs incurred during the 8 weeks but paid by the next due date.

Payroll Costs:

• Payroll costs incurred (earned) prior to the beginning of the 8 weeks but paid for during the 8 weeks are also allowable. Unclear is how far in arrears payroll will be allowed. Likewise, payroll earned but not paid is allowable, so long as it is paid for on the next regular payroll date.
• Borrowers may be able choose an alternative payroll covered period to align the start of their 8-week covered period.  This option is available for employers with a bi-weekly (or more frequent) payroll cycle. For example, if the loan proceeds were disbursed in the middle of a payroll cycle, the borrower may begin the covered period with the first day of the next payroll period.
• Owner-employees are accounted for separately, and their maximum payroll costs allowable for forgiveness is the lesser of (1) their 2020 cash compensation up to $100,000 prorated over the 8 weeks (8/52) ($15,385), or (2) their 2019 cash compensation prorated. This limitation appears to be aimed at preventing owners from increasing their own pay and having it forgiven.
• The $100,000 compensation limit applies to all forms of cash compensation, not just base salary and wages.

FTEs:

• FTEs are calculated using a 40-hour week, rather than the 30 hours as had been speculated.
• An employee’s FTE cannot exceed 1.0.
• FTEs are rounded to the tenth decimal place, unless you are adopting the simplified method of 1.0 FTE for hours of 40+ and 0.5 FTE for hours under 40.
• Average annual salaries or hourly wage for the first quarter of the year will be used for comparison with the averages for the 8-week covered period (which must be at least 75% of the first quarter). This test applies on an individual employee basis, but only for employees earning less than $100K in 2019 (annualized) or who were not on the payroll in 2019. Average compensation (by employee) during the 8 weeks that is less than 75% of that employee’s compensation for Q1 will cause an reduction in forgiveness by the amount below 75% (unless the reduction is reversed through one of the exceptions below). A formula is provided to determine the compensation earned by an hourly wage earner.

Forgiveness Reductions:

• Reductions in forgiveness caused by failure of the 75% test above can be reversed through a safe harbor restoration of salaries/wages by June 30, for decreases occurring between February 15 and April 26 (yes, an entirely different period of time and restored at a point in time).
• Forgiveness can also be reduced if the average FTEs during the 8-week covered period falls below a look-back period of either February 15 – June 30, 2019 or January 1 – February 29, 2020. Another safe harbor exists for borrowers restoring any declines in FTEs from February 15 – April 26, 2020 by June 30, 2020. Owners appear to be excluded from the calculation of FTEs.
• Employees declining written offers to return to work, terminated for cause, voluntary separations, and voluntary reductions in hours will not be counted in the FTE reduction when properly documented.
• In addition to cash compensation, not to exceed $100,000 prorated, the cost of employer-paid health care benefits, including insurance premiums; payment of any retirement benefit; or the payment of state or local tax assessed on the compensation of employees is includable in allowable costs. Interestingly, these costs for owner-employees/self-employed individuals/general partners do not appear to be allowable.
• The SBA appears to have included a new safe harbor by providing for no forgiveness reductions for borrowers whose FTEs are the same at the end of their covered period as they were on January 1, 2020.

Non-Payroll Costs:

• Allowable non-payroll costs include covered interest, utilities, and rent. Rent is now clarified to include real and personal property.
• Allowable non-payroll costs include those incurred or paid during the covered period, but exclude prepayments of interest.

There will no doubt be more details to emerge in the days ahead. For those interested in taking a deeper dive now, Tony Nitti has written another excellent article for Forbes which can be found here. For more of our updates on the PPP, check out this blog post, which we update frequently with new information as it is released.